The article “What Investors Need To Know About Changes To TD e-Series Funds” was originally published on MoneySense on September 24, 2019.

TD e-Series Funds have been staples for passive index-fund investors and Canadian Couch Potato enthusiasts for two decades. Here’s a roundup of recent changes to the funds, and what that may mean for you.

Changes to several TD mutual funds were proposed in August 2019. Some of those changes impact active TD mutual funds that will be merged, but the focus of this column is the changes to TD e-Series funds that are part of the Canadian Couch Potato model portfolio that we’ve referenced at great deal here on over the years.

The investment objectives for TD Canadian Bond Index FundTD Canadian Index FundTD U.S. Index Fund, and TD International Index Fund are all being changed. Until now, these e-Series funds have invested in individual bonds and stocks directly. The changes will result in the e-Series funds instead owning exchange-traded funds (ETFs), which in turn own individual bonds and stocks.

In particular, the e-Series funds will own TD ETFs. TD currently offers 13 ETFs that trade on the Toronto Stock Exchange (TSX) and track different indices.

Now, it may sound like a conflict of interest that TD e-Series funds will buy TD ETFs. It may also sound like fees upon fees if the funds will own other investments that generally have their own management expense ratio (MER) fees. But quite to the contrary, one of the objectives of this change is to lower investment fees and leverage TD’s existing economies of scale.

The e-Series fund MERs currently range from 0.33% to 0.5%, while TD ETF fees for similar indices are only 0.06% to 0.2%. Note the reference to “similar indices”—not the same indices. As an example, the TD Canadian Index Fund tracks the S&P/TSX Composite Total Return Index, whereas the comparable TD Canadian Equity Index ETF tracks the Solactive Canada Broad Market Index. The Solactive index has lower index-licensing fees, which means TD will pay less to track it, and that could shave a couple of basis points off the operating costs of the ETF compared to the Standard & Poor’s (S&P) index-tracking fees.

TD is swapping S&P, Financial Times Stock Exchange (FTSE) and Morgan Stanley Capital International (MSCI) indices for four Solactive indices for their e-Series funds.

Fee competition continues to ramp up in Canada for all types of investment products and channels, and cost-conscious investors are benefitting. The four e-Series funds are estimated to have fee reductions of about 5 basis points or 0.05% after the investment objectives change.

The different indices may track slightly different allocations of bonds and stocks, but given the number of holdings is into the hundreds, the impact on TD e-Series fund performance should be minimal after the change. Presumably, the goal is to increase performance net of fees by bringing costs down and holding ETFs that track low-cost indices instead of buying individual bonds and stocks directly.

Even after the fee reduction, the cost for e-Series funds may seem steep to ETF investors, and are obviously higher than even TD’s own ETF fees. But index mutual funds do have their place.

Couch Potato investors with small accounts have long been directed towards e-Series funds over ETFs as an effective solution for accounts under $50,000, unless your discount brokerage offers commission-free ETFs.

TD e-Series funds are not subject to commissions on purchase and sale, other than a potential early redemption fee of 2% if selling within 30 days. This may make index mutual funds a better solution than ETFs if you are doing frequent, small, pre-authorized contributions, or if you are retired and decumulating your Couch Potato portfolio. Discount brokerage commissions on ETF purchases generally range from as little as nothing, up to $10 per trade.

Some accounts may be better suited to mutual funds over ETFs, just like some investors may be better suited to working with an investment advisor than being a do-it-yourself (DIY) investor. Everyone is different.

ETFs are also subject to differences between the bid and ask price, which may cause your purchase to be slightly more expensive or your sale to be slightly less lucrative than a mutual fund, which always trades at net asset value (NAV).

The tax implications of the pending TD e-Series switch should be minimal. The underlying e-Series fund investments will be transferred on a tax-deferred basis to the ETFs they are acquiring. TD estimates approximately 3% to 8% turnover of the funds’ existing holdings as the S&P and Solactive indices hold slightly different allocations of investments. This may trigger some capital gains, albeit minimal, and only for those who own TD e-Series funds in taxable non-registered or corporate investment accounts (RRSPs* and TFSAs* being tax-deferred and tax-free, respectively).

Another big change that TD is rolling out is the ability for investors outside TD to buy e-Series funds. Many other discount brokerages will now offer the funds. If you have a TD account and want to transfer your e-Series investments to another brokerage that offers them, you can complete paperwork with the receiving brokerage to do so and transfer your investments in-kind (as is) to defer any potential tax payable on sale.

Other banks may follow TD’s lead to offer index mutual funds that own their own respective ETFs. It wouldn’t be surprising, either, to see TD offer an e-Series asset allocation index mutual fund or ETF to compete with recent all-in-one ETFs introduced by BMO, iShares and Vanguard.

These innovations provide competition for robo-advisors and traditional investment advisors who will need to continue to differentiate themselves to appeal to investors. Not everyone is meant to manage their own investments, but the tools and options for DIY clearly continue to expand as TD and others vie for your investment dollars.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.